MARKET MECHANISM

– a mechanism by which the use of money exchanged by buyers and sellers in a market
tends to optimize distribution of goods and services
– the market is a mechanism by which buyers and sellers interact to determine the price and
quantity of goods or services (SAMUELSON, NORDHAUS)
– in an abstract sense (literal meaning) – a place where goods and services are bought and
Sold
The Basic Decision-Making Units
 A firm is an organization that transforms resources (inputs) into products (outputs). Firms are
the primary producing units in a market economy.
An entrepreneur is a person who organizes, manages, and assumes the risks of a firm, taking
a new idea or a new product and turning it into a successful business.
 Households are the consuming units in an economy.
 Governments – collect taxes from households, buy goods from firms and distribute those
goods to households individually or collectively.
The circular flow of economic activity shows the connections between firms and households in input
and output markets.
Input Markets and Output Markets
• Output or product markets are the markets in which goods and services are exchanged.
• Input markets are the markets in which resources—labour, capital, and land—used to
produce products, are exchanged.
Production – a process of combining various material inputs and immaterial inputs (plans,
knowhow) in order to make something for consumption (the output).
Factors of production: LABOUR (the ability to work), LAND and CAPITAL
Input markets include:
 The labour market, in which households supply work for wages to firms that demand labour.
 The capital market, in which households supply their savings, for interest or for claims to
future profits, to firms that demand funds to buy capital goods.
 The land market, in which households supply land or other real property in exchange for rent.
Determinants of Household Demand
A household’s decision about the quantity of a particular output to demand depends on:
 The price of the product in question.
 The income available to the household.
 The household’s amount of accumulated wealth.
 The prices of related products available to the household.
 The household’s tastes and preferences.
 The household’s expectations about future income, wealth, and prices.

Market functions:
1. provides information about consumer's needs, interests and preferences
2. promotion - the effort to inform, persuade, or remind potential customers about a
business’s products or services.
3. distribution of pensions between the owners of factors of production

DEMAND and SUPPLY (DOPYT a PONUKA)

• Demand: the ability and willingness to buy specific quantities of a good at alternative prices in a
given time period, ceteris paribus.
• Supply: the ability and willingness to sell specific quantities of a good at alternative
prices in a given time period, ceteris paribus.
Ceteris paribus: the assumption that nothing else is changing.

Law of Demand (Zákon klesajúceho dopytu)

There is a negative relation between the price of a good and the amount of the good that buyers are
willing to purchase.
There is an inverse relationship between the price and quantity demanded.
E.g. When the price goes down for milk, the quantity consumers buy will increase.
Demand curve

price

The demand curve slopes down!

Quantity demanded
Determinants of Demand:
1. tastes / preferences 4. income (príjem)
2. number of consumers 5. expectations
3. prices of goods

Law of Supply (Zákon rastúcej ponuky)

There is a positive relation between the price of a good and the amount of the good that producers are
willing to produce and sell.
There is a direct relationship between the price and quantity supplied.
E.g. When the price goes up for milk, the quantity producers make will increase.

price
supply

The supply curve slopes up!

quantity
Determinants of Supply
1. price of recources 4. taxes
2. number of producers 5. expectations
3. technology

When the quantity demanded is equal to the quantity supplied, we have equilibrium(E).
Equilibrium means that there is no tendency for things to change. The system is in balance.
Price (s)

equilibrium Supply (s)

Demand (D)
Quantity
The equilibrium is at the intersection of the demand curve and the supply curve.